Warning, Crash Ahead

We were warned before the Great Recession by Brooksley Born that there were new financial products, derivatives, that needed to be regulated before bad things happened. PBS Frontline produced a good three part series titled, The Warning, documenting the events. It's worth watching. Do you remember subprime loans being bundled and resold as derivatives?

Maybe it's time to check out the present derivatives market. Investopedia cites estimates that there could be more than one quadrillion dollars worth. Yes, that is 1,000 trillion dollars. Visual Capitalist provides some great graphics that are well worth a quick look or a longer look.

So, how similar or different are the economic conditions today in 2020 and that of 2008? If you do a little research, you'll understand that market conditions are very similar. If that's not scary enough, it should become apparent that it's significantly more precarious now than in 2008.

A good starting point is to compare debt levels, then and now. There are different categories of debtors. Just search consumer debt in USA and you'll find that consumer or household debt is now at record levels. Yep, more than in 2008 although student and auto debt now exceed mortgage debt. Here are a couple of links for the lazy, one from Bloomberg and another from Marketwatch. Next, do a search on corporate debt levels. Yikes, everyone thinks that corporate debt levels are dangerously high....CNN, CNBC, Business Insider, Forbes and more. If you've been paying attention, you'll have noted that those stories are kind of old. You can bet that those levels are quite a bit higher now because the Fed has been pouring trillions of dollars into the REPO market and buying corporate bonds and god only knows what and how much else. Try your own search on that and you'll notice that the powers that be are doing a damn good job hiding that information.

You might be wondering what those corporations have been doing with all that borrowed money. You can safely bet that they haven't been opening new factories. Maybe you've heard something about stock buy-backs...think airlines, but they're not the only ones. Basically, corporations buy back stocks to reduce the number of shares in circulation which inflates the price of the stocks. It's really good for the executives who get bonuses in stock options. That used to be illegal until we turned into the deregulation nation beginning in the Ronald Regan administration, but I digress.

We should also note interest rates over the last ten or twenty years. Yes, they're rock bottom low now. That is quite unfortunate because lowering interest rates was the way that the Fed could stimulate the economy. Interest rates can't really go any lower than they are now which means that when the market crashes again, there aren't the normal tools available to prop it back up.

So, what should you do about all this? Well, if you happen to be one of the few Americans that are fortunate enough to have money invested in the markets, GET OUT NOW while you have a chance!

Look at it this way...

In 2008, the DOW was at about 20,000. By mid or late 2009 it sunk to 6,500. It took about 10 years to recover that lost ground. If you had $100,000 in the market before it crashed and left it in, it took ten years to get that money back. If you took the money out of the market before it crashed and then reinvested it just one year latter, you'd have quadrupled or quintupled your money.

Your investment advisor or money manager will, of course, tell you not to panic, to leave your money where it is...or to shift it around a little. That is bad advise for you, but good for him. His income depends on having your money in his control. He won't make any money on your money until the market hits the bottom and is once again safe for you to reinvest.

The good news in all of this is that you don't have to loose a bunch of money when the market tanks. On the contrary, you have an opportunity to double, triple or quadruple your money if you divest now and reinvest in about a year after the market starts to crash.

Remember the classic investment advise...buy low, sell high. Right now, the market is about as high as it will be for at least ten years. A wise person learns from the mistakes of others while a fool fail to learn from his own.

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